Are you paying a “Lazy tax” on your insurance?

What is a “Lazy Tax” (or “Loyalty Tax”) ?

In essence existing customers could be paying more to subsidise these new customers, which is sometimes called a “Loyalty Tax”. Choice prefer to call this a “Lazy Tax” because it represents the penalty you pay for not bothering to shop around.

Allan Fels, former chairman of the Australian Competition and Consumer Commission and the NSW Emergency Services Levy Insurance Monitor, has argued for measures to stop this subsidization. He estimates that the cost of Lazy/Loyalty taxes in Australia could be as high as $3.6 Billion

However the alternative view from the Insurance Council of Australia is that this is “competition in action” i.e. Insurance companies discounting to win new customers is evidence of competition.

Whatever the reason for this behaviour, the question is, how do you make sure that you are not paying more than you need to?

How does a Lazy Tax arise for life insurance policies?

A lazy tax may be the result of a number of factors:

• Changes in the way insurers rate age, gender, smokers, occupations etc
• Duration-based pricing
• First year discounts or honeymoons
• Different product “series” or legacy products
• No upgrade of benefits

Changes in pricing:

Insurers are continually changing the way they rate different age groups, smokers, genders and occupations over time. Claims data and other actuarial information is used to adjust their pricing.

This could affect your premium if, for example, you are a doctor and your insurer receives a large number of claims from doctors over time. The insurer may react by adjusting their premium factor for doctors upwards, resulting in a premium increase.

Changes in mortality rates and survival rates for certain medical conditions may also lead to more generalized changes in rates. However insurers are adjusting their premiums all the time and this may result in your insurer becoming more expensive than others over time, despite starting out cheaper.

Duration-based pricing:

In recent years ASIC has noted that most life insurance companies have adopted a duration-based pricing model for their new policies.

This pricing model assumes that the likelihood of a claim increases the longer a policy is held. New customers receive large initial discounts which are progressively withdrawn over time.

Therefore the longer you stay with an insurer the less discount you will receive – this is, in effect, penalising loyalty.

First year discounts:

An attractive first year discount may be offered by a provider to new customers only. First year discounts can range up to 27.5%. Typically the discount is removed or reduced over subsequent years until it becomes more of a “standard” rate.

As most life insurance premiums are “stepped” premiums, meaning premiums increase with age each year, it may be hard for consumers to detect these discounts dropping out.

The end result could be that the standard premium, without the discounts, is higher than what other insurers are charging, so that you end up paying more over the long term.

Different policy series or “legacy” products:

Insurance companies often issue their policies in “series”. They may reduce the premiums for the current series on sale without reducing premiums for older series.

In fact, if the older series or pool of customers has a particularly high claims experience, the insurer may increase rates for this older group more than for the current series.

This can also be an issue for “legacy” products, i.e. those which are now closed to new business. In recent years there have been a number of brands taken off the market due to being acquired – including AMP, Asteron Life, BT, CommInsure and Integrity.

Because these brands are no longer competing for new customers the premiums may become less competitive over time. If this happens, healthy lives may leave the pool, leading to higher premiums for those who remain due to increasing claims.

No upgrade of benefits:

Unless your policy has a benefit upgrade clause, it may not receive improvements to product definitions over time. This could result in your policy having weaker product definitions or fewer benefits than new policies on issue.

How large could your “Lazy Tax” be?

Even without considering legacy policies or the more expensive direct life insurance policies, there can be some large variations in the premiums on offer from insurers.

Unless you actively compare premiums you won’t know if you are paying above market for your cover.

To indicate how large a lazy tax you could be paying we have used Compare Quotes to provide a snapshot of the range of premiums on offer for a new customer for different types of cover.

Potential Lazy Taxes

(Premiums below are based on a male accountant, non smoker, aged 40, living in Victoria as at 30th June 2024)

Life only $1 Million cover:

Range of premiums – $361 to $513 annually

Potential Lazy tax = $153 or 42%

Life and TPD (Any Occupation) $1 Million cover:

Range of premiums – $663 to $880 annually

Potential Lazy tax = $217 or 32%

Trauma standalone $200,000 cover:

Trauma “Standard” policies range of premiums – $572 to $993 annually

Potential Lazy Tax = $421 or 73%

Trauma “Plus” policies range of premiums – $601 to $1,137 annually

Potential Lazy Tax = $536 or 89%

Income protection, indemnity, monthly benefit $6000, 30 day waiting period, to age 65 benefit period including claims escalation option:

Range of premiums – $1,103 to $1,753 annually

Potential Lazy Tax = $650 or 58%

The above shows that there are large variations of up to 89% in premiums for similar cover. Interestingly for trauma policies there is overlap between standard and plus policies such that some people paying for “standard” policies could actually afford “plus” policies which offer more benefits.

Of course differences in benefits and product definitions should be taken into account when comparing policies not just price. When you Compare Quotes you can also compare the benefits offered by each policy.

How Insurance Watch can help you avoid paying a “Lazy Tax”

First year discounts when taking out a new policy

It is not always easy to switch policies (see below) so when taking out your Life, TPD, Trauma and Income Protection covers you need to be aware of any discounts included in the premiums. If the underlying rates i.e. the rates without the discount, are more expensive than others you could end up paying more long term.

We have compiled an extensive list of the Latest Discounts and Offers from the insurance companies we compare. As at 1st July 2024, first year discounts on offer range between 6% to 27.5%. These discounts tend to reduce to 0% over the subsequent 2 to 10 years. Depending on how large the starting discount is and how fast this reverts to “standard rates”, this can result in steep increases in premiums in the early years of the policy.

This is not to say that all first year discounts are bad. In some cases there are significant savings to be had – but from a budgetary perspective it pays to be aware that these are “honeymoon” rates.

How to find long term premium savings

There are some insurers with health and well-being schemes that offer premium discounts for being active and for having health checks e.g. AIA Vitality. However you need to be aware that if you do not accumulate enough points under these schemes your premium discount can be decreased.

A number of companies offer discounts which do not reduce over time – TAL Health Sense discount, NEOS Preferred Lives discount, Encompass Healthy Life discount, MetLife BMI discount and MLC Vivo discount. These discounts will apply for the duration of your policy. However, to receive these discounts you generally need to meet certain criteria when you apply, including a BMI (Body Mass Index) in a healthy range, and because of this they are not included in the online quotes shown by Compare Quotes. However, if you are eligible, the discount will be applied during the application process.

It is therefore important to be informed about what premium discounts are inbuilt in the policy you are purchasing and also any other discounts you may potentially qualify for.

Comparing to an existing policy

If your insurance premium has become progressively more expensive it may be difficult to know if this is due to age, indexation or a “Lazy tax”. The best way to find out is to compare your policy to what is currently available using Compare Quotes.

Insurance Watch can help you compare the cost of your existing Life and TPD, Trauma and Income Protection policies. When you receive your renewal each year you can use Compare Quotes to see the quotes from the range of insurers we compare to see if a better deal is available. We provide a detailed listing of benefits and definitions so that you can compare benefits as well as premiums.

It is always important to ensure that you are comparing apples with apples. For example, an “Any Occupation” TPD policy is different to an “Own Occupation” TPD policy and if you have an existing “Agreed Value” income protection policy this is different to most new policies which are “Indemnity” policies. Also an income protection policy with a 90 day waiting period will have a much lower premium than a 30 day waiting period.

There may be reasons why you would be prepared to pay more for a particular policy. Another policy may be cheaper but not include some of the benefits you value, for example free child cover, life cover buyback option or funeral advancement benefit. You may also want to consider the feedback provided by other customers as to their experience in dealing with an insurer. Or how an insurer has performed in the past in paying claims.

You can do this research yourself online. However if you would like one of our advisers to review your current policies and provide recommendations please go to Get Advice and complete our online Fact Find.

What are the risks in switching policies?

Even if you have found that your policy is expensive or has fewer benefits than other policies on offer today you may find it difficult to switch policies.

Changing insurance policies may not be easy or feasible because:

• A full application will usually need to be completed for a new policy. Under your Duty of Disclosure to the new insurer you will need to disclose all of your past medical conditions. Depending upon your age and situation, this could be quite onerous. Non disclosure could mean that the insurer can void your policy.
• If your health has deteriorated since you took out your existing policy a new insurer may decline to offer cover or impose exclusions or premium loadings.
• Based on your age or the amount of cover applied for there could be a requirement that you have blood tests or medical exams.
• Qualifying periods may start again e.g. for suicide under life cover and for certain trauma conditions. However most insurers will waive this if you have already served this qualifying period with your existing insurer for the same cover/condition.

An alternative to switching cover may be to seek a retention discount from your existing insurer – you may find that they are willing to discount your current policy to keep you as a customer.

Or, if your circumstances have changed, you may be able to make modifications to your existing policy which reduces the premium e.g. if you have stopped smoking or moved to a less risky occupation.

Why use a life insurance specialist like Insurance Watch?

Insurance Watch allows you to compare policies online and find out if you are paying a “Lazy Tax”.

A 2019 report by Investment Trends found that only 15% of financial planners were insurance specialists. Financial planners who specialize in investments are unlikely to have the same expertise in comparing a large range of insurance products and understanding the premium discounts and benefits included in each product.

Some other comparison websites only compare the more expensive policies sold direct to the public. Others purport to compare a large number of “brands” but these are mainly rebadged policies from a few underlying insurers. Worse still, some comparison websites “compare” policies from the insurance company who owns them.

Insurance Watch is privately owned and compares Life, TPD, Trauma and Income Protection policies online from some of Australia’s largest life insurance companies. Since 1999 we have helped thousands of Australian consumers avoid paying a “Lazy Tax”.

The above information is general advice and information only and does not take into account your personal circumstances. Before deciding to purchase an insurance product you should read the Product Disclosure Statement and consider whether this product is right for you, having regard to your objectives, financial situation and needs. If you would like to receive help with your personal situation please go to Get Advice.